Successful reform: past lessons, future
challenges*
Gary Banks
Chairman, Productivity Commission
Introduction
I have been asked to speak to you today, at this annual forecasting conference,
about the future course for reform in Australia. This is an important topic, with two
dimensions to it. One relates to priorities within the reform agenda itself. As
Chairman of the Productivity Commission, that is of course something I am more
than willing to discuss, and have done so at some length in my last two published
speeches. But, important as it continues to be to know what future reforms are most
needed, arguably the bigger challenge for Australia right now is the other
dimension, knowing how to implement them successfully.
Paul Kelly, Australia’s pre-eminent policy journalist and chronicler of our reform
history over the past three decades, asserted earlier this year that “the historic post1983 reform era is terminated”. Ross Garnaut, one of the most policy-influential
academics of that era, recently made the following assessment: “Economic policy
since the GST [2001] has been characterised by change, rather than productivity
enhancing reform”. He went further: “Attempts at major reforms have failed
comprehensively and poisoned the well for further reform for a considerable while”.
* Keynote address to the Annual Forecasting Conference of the Australian Business Economists,
Sydney, 8 December 2010. Earlier versions of the paper were presented at the Economic
Society’s ‘Emerging Economists’ seminar series in Sydney in August, the Department of
Transport and Infrastructure’s Seminar Series, in Canberra in October, and the WA ‘Quarterly
Forum’ and Australasian Treasury Officers’ Conference, in Perth in November.
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Similar sentiments have been expressed by other observers of the policy scene. It is
notable that they have been doing so despite what must be the most extensive and
ambitious national reform agenda ever placed before the Council of Australian
Governments. Their assessments appear to have been prompted by the recent
setbacks for the major reform initiatives for climate change and taxation, together
with the handling of the ‘Big Australia’ issue in the lead-up to the recent federal
election. But they may also reflect on some policy excursions over the past decade
in areas such as infrastructure, industrial relations, industry assistance, energy
efficiency, water, hospitals and family support.
The electoral outcome itself, in bringing us the ‘new paradigm’ of minority
government dependent on the cooperation of independents, is seen by many as an
obstacle to further productivity-enhancing reforms. The Australian Financial
Review’s editorial just after the election declared it “the worst possible outcome for
stable government and the unpopular economic reforms that are needed...”
Moreover, reform must now occur in a post-GFC context, with fiscal pressures that
will limit the scope for investment in a number of the ‘human capital’ areas within a
National Reform Agenda devised in fiscally more bountiful times. The need to
rebuild its budget has also constrained the ability of the Australian Government to
‘reward’ the States for their reforms, a central tenet of the National Competition
Policy’s successful implementation and likely to remain the key to ongoing state
support for the COAG Reform Agenda.
This comes at a time when the promise of a more cooperative or collaborative
Federalism has been wearing increasingly thin. Not only has Western Australia
continued to play hard to get on national reform, there has been strong resistance to
Commonwealth initiatives in key reform areas by the two ‘heavyweight’ eastern
states, Victoria (eg. water, hospitals) and NSW (eg. OH and S, national curriculum).
This apparent discord may be heightened by changes in government at the state
level.
The productivity imperative
If ‘productivity enhancing’ reform is indeed becoming a no-goer, Australia is in for
a tough time. For a start, this would make it harder for us to meet the fiscal
challenges of the Global Financial Crisis in the short term and, in the long term, the
ageing of the population. We would also struggle to meet the demands and costs of
more sustainable resource use and desirable environmental rectification. Australians
may again start to see international competition and globalisation as threats rather
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than opportunities. And our capacity to raise the living standards of Indigenous and
other disadvantaged members of the community would be weakened, when it needs
to be strengthened.
Productivity enhancing reform is so crucial to our economic (and social) futures
because productivity growth itself – the ability to get more out of a country’s
resources – is the mainstay of economic progress. Growth in labour productivity
accounted for around 80 per cent of the growth in per capita incomes of Australians
over the past 4 decades, with ‘multifactor’ productivity growth (which abstracts
from the growth effects of increasing capital) accounting for about 40 percent of
that.
If, as the Nobel Laureate Paul Krugman has famously put it, ‘in the long run
productivity is nearly everything’ Australia’s prospects currently may not appear
very promising. Following a stellar performance in the 1990s, driven in large part
by the structural reforms initiated in the previous decade, our productivity growth in
the early 2000s fell back to its long term average. That in itself is no cause for
alarm. But since then it has fallen below even pre-1990 rates. In the most recent
year for which we have data, 2009-10, there was only slight growth in (the
traditional 12 industry) market sector MFP; though this was an improvement on the
previous year when MFP, buffeted by the global crisis, actually fell by 2.4 per cent,
something not seen in almost 30 years.
Just as the productivity surge in the 1990s yielded substantial income gains on
average for Australian households, the productivity slump of the 2000s could have
been expected to bring with it a decline in incomes. In fact, thanks largely to our
rampant terms of trade, income growth for most of that period was at historical
highs. But both history and economic logic tell us that this cannot go on
indefinitely. I will leave forecasting to those here expert in that field, simply noting
that the escalation in prices for our mineral exports reflects circumstances on both
the demand and supply sides of markets which can be reversed or which can give
rise to ‘correcting’ changes.
At some point we will then return to Krugman’s long run, and reliance on
productivity growth to achieve further improvements in the living standards of
Australians. I am intentionally abstracting here from growth in the other two Ps,
participation and population. The former has natural limits – and is currently
historically high – while population growth is dependent on (net) immigration, the
impact of which on the average per capita income of existing residents is ambiguous
(with a greater likelihood of it being negative than positive).
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So how do we ensure that productivity again rises to the occasion? This question is
being posed primarily as a challenge for further reform. While I would naturally
agree with its importance, we need to keep things in perspective. As Commission
research has demonstrated (and we have previously been at pains to point out) much
of the recent pronounced decline in multi-factor productivity can be traced to
developments in a few specific markets – reflecting the mining boom and drought –
that cannot be blamed on lack of reform or poor policy. It is therefore likely to be at
least partly self correcting in time. (Agricultural MFP productivity has already
rebounded – growing by 14 per cent in 2008-09 – but mining much less so, in part
because investment and employment continue to grow strongly.) This is set out in
some detail in a number of Commission research publications (and in a refereed
journal article). But even without the benefit of such ‘forensics’, the coexistence of
historically low growth in multifactor productivity with historically high growth in
income, capital investment and jobs over recent cycles is likely to have been more
than coincidental.
That said, some of the decline has also reflected unusually high growth in labour
and capital absorbed by the energy and water sectors, which in part has been
induced by policies that are likely to have a lasting negative influence on measured
productivity. By the same token, Australia’s recent productivity declines obviously
would not have been so pronounced had there been more productivity-enhancing
reform over the past decade, depending on the lead times involved. And even if we
can expect some ‘natural’ recovery in the productivity numbers in time, reforms that
reinforced or added to such gains could bring substantial additional benefits to the
Australian community.
For example, if (labour) productivity growth could just get back to the long-run
average rate of 1.75 per cent that preceded the 2004-2008 cycle, rather than the 1.6
per cent average growth assumed in Treasury’s latest Inter-generational Report,
then, abstracting from changes in the rate of employment and investment, per capita
incomes would be 6 per cent higher by 2050. And if we could reclaim the 2 per cent
average annual growth recorded in the 1990s in a sustainable way – admittedly a
big ask – Australia’s GDP would be some $400 billion larger than otherwise, with
per capita incomes 17 per cent higher (worth nearly $19,000 per person in today’s
dollars).
In short, a little bit of productivity growth goes a long way. Any reform that could
achieve this successfully is a reform worth pursuing. The real risk stemming from
the boom, if our own history is any guide, is one of complacency about pursuing
those reforms.
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That of course begs the question as to what ‘successful reform’ actually means in
this context. This is not a trivial question.
What is a ‘successful reform’?
The term ‘reform’ is being employed liberally today by the proponents of almost
any policy change, whether it is likely to advance the public interest or not. It has
accordingly begun to lose meaning in public discourse and, worse, risks giving real
reform a bad name. (A senior state official mentioned to me recently that his
government now avoids using the term.)
The dictionary tells us that the word ‘reform’ actually means “change for the
better”. In a policy context, that translates to changes in existing government
financial, regulatory or procedural arrangements that are likely to make the
community ‘better off’ (which I interpret broadly to encompass living standards and
quality of life).
Against this (reasonable) benchmark, I am sure that many of us can think of policy
initiatives that have had a doubtful entitlement to the reform label. For example,
over the past decade, there has been widespread questioning of the benefits of such
initiatives as the subsidy for local ethanol production, the Baby Bonus, the bans on
filament light globes, the Fuel and Grocery ‘watches’ and Cash for Clunkers,
among many others. (You will have noted that even this truncated list transcends
politics.)
For a policy initiative to be worthy of the name ‘reform’ we must have some
confidence, based on established theory or evidence, that it is likely to yield a net
benefit to the community over time. Moreover, the likely gains should exceed those
from other policy options directed at the same objective. To take a topical example,
the estimated ‘price’ for a tonne of carbon abated varies greatly, depending on the
particular policy measure employed, ranging around $10-40 per tonne under an
explicit tax or trading regime, to hundreds of dollars for solar feed-in tariffs, and
thousands of dollars for some other schemes. The latter programs accordingly
should have little claim on the term ‘reform’ in a greenhouse policy context (apart
from any claims they may have on industry policy or other grounds).
So what is a ‘successful’ reform? There are two key conditions that I believe need to
be satisfied.
One is that the outcomes of the reform broadly accord with its objectives and what
was anticipated when it was introduced. In other words it should achieve its goal,
and do so without major ‘collateral damage’ or unintended consequences. The fact
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that the latter phenomenon has acquired the status of a ‘law’ (more popularly
attributed to ‘Murphy’) tells us that bad surprises are all too common. While
sometimes this may be of little consequence in the total scheme of things, in other
cases it can compromise the objective being pursued. For example, it is possible to
imagine a greenhouse policy that actually increases global emissions, or a resource
rent tax that reduces production activity, or alcohol or drug initiatives that
encourage greater usage by target populations.
The second feature of a successful reform is that it is sustainable; that it is not
vulnerable to being reversed, or substantially amended in ways that negate its
objectives. To satisfy this condition, the reform must either be broadly accepted by
the public when introduced or, if not, it must become so in time. It must not remain
too contentious, nor (related to this) meet much ongoing organised resistance.
This is illustrated by the contrasting experiences of the GST and Work Choices. The
former, which was vigorously debated and opposed politically when implemented,
has come to be accepted as an established part of the policy framework. Indeed the
only remaining contention surrounding the GST is over its rate and coverage – and
how the revenue should be distributed among the states. Work Choices faced
similar initial resistance, but this did not subside after implementation. Rather,
opposition escalated – ultimately contributing to the defeat of the government that
introduced it.
Other illustrations that come immediately to mind are the 25 per cent tariff cut of
1973 versus the incremental program of ‘tops down’ tariff reductions introduced
from the late 1980s, and the contrasting electricity market reform experiences of
Victoria and NSW.
It follows that a reform could be a ‘good’ one at some level – in terms of its
foundations and likely community-wide effects – yet still not be successful. Reform
will often fail if its effects have not been sufficiently thought through or it does not
win acceptance as being beneficial. Among such failures over the years one might
arguably again include the original 25 per cent tariff cut, together with various
aborted reforms in such areas as taxi regulation, property taxation, nursing home
funding, pharmacies and broadcasting.
Why is it so hard?
Knowing what reforms are needed, while difficult enough to get right, is clearly
only half the battle. Getting such reforms up, and making then stick, are arguably
the more difficult challenges. There is nothing new or particularly Australian about
this. On the contrary, it could be described as the ‘natural order’ of things and has
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been long observed. In his famous little instruction manual for heads of state in
Renaissance Italy, Nicolo Machievelli described the problem thus:
There is nothing more difficult to carry out, more doubtful of success, nor more
dangerous to handle, than to initiate a new order of things. For the reformer has
enemies in all who profit from the old order, and only lukewarm defenders in those
who would benefit from the new.
While political scientists and public choice economists have since elaborated in
more technical terms on the political and informational forces at work,
Machievelli’s insight remains the essential one.
The corollary to it is that often there is nothing easier for governments to do than to
introduce bad policies, especially those that can meet the wishes of particular
interest groups without being on the wider public’s radar. Consider how easy it is
for governments to provide a new subsidy or regulatory benefit to an industry or
community group and how hard it can be to remove them again. Australia’s tariff
history once again provides the stand-out illustration, with the ‘removal’ phase
having gone on for some 40 years so far, even then being partially offset by new
forms of assistance along the way. But there are many others. For example, even the
dismantling of the home insulation subsidy scheme, though it was in existence only
a short time and having public support for its termination, required a special further
assistance program to compensate the emergent suppliers who were beneficiaries of
the scheme.
The obstacles to success are so great that any true reform might fairly be considered
a significant achievement. This is particularly so in Australia’s case, given the
additional challenges posed by the relatively short and multiple electoral cycles in
our Federal system. That Australia has successfully implemented as much reform as
it has since the 1980s – reforms that have significantly enhanced the average living
standards of Australians – is therefore something to be celebrated, and has attracted
international attention.
Achievements of the ‘Reform Era’
The range of reforms has been extensive. But some could be described as ‘game
changers’ because of their scale or scope, or the ongoing impetus they provided for
further necessary change and reform. Among these, the stand outs were the floating
of the dollar in 1983 – which exposed structural weaknesses in our economy while
facilitating adjustment to further necessary reforms and market shocks – and the
opening of our markets to foreign capital and merchandise, which heightened
competitive pressures on Australian enterprises and led in turn to pressure on
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governments for reforms that would reduce the costs of businesses and improve
their operational flexibility.
The dismantling of centralised wage fixation and advent of enterprise bargaining
was a key consequence – enabling firms more scope to fashion remuneration and
work practices to the circumstances of their markets and regions. Another was the
reform of inefficient government monopolies responsible for such vital
infrastructural services as energy, telecommunications, transport and water. The
reforms brought improved governance and more competition, yielding higher
productivity and lower costs, with more cost-reflective pricing.
Those latter reforms commenced at the state level, but eventually found more
consistent expression in the National Competition Policy, which also incorporated
a process for systematically identifying, and testing the justification for, anticompetitive arrangements across the whole of Australia’s regulatory landscape.
The 1980s also saw some important reforms to the tax system that reduced burdens
and inefficiencies, and helped improve the attractiveness of Australia as a place to
do business. These included the broadening of the tax base through the introduction
of a fringe benefits tax, taxation of realised (real) capital gains, and plugging of
various loopholes and exemptions (eg for the gold industry), combined with cuts to
high marginal rates on income and the introduction of dividend imputation. While
some unjustifiable tax concessions for investment were removed, a justifiable one
for Research and Development was introduced. This period also saw the successful
introduction of the Petroleum Resource Rent Tax.
There were also some path-breaking reforms in key ‘social policy’ areas of
education (notably the HECS scheme) and health (such as Victoria’s ‘case mix’
funding mechanism).
Some of these reforms admittedly could be categorised as ‘low hanging fruit’. But
none were straightforward to engineer and nearly all faced high political hurdles at
the time.
What were the success factors?
A number of aspects of the ‘design’ of the reform program in this period help
explain its success. One has already been alluded to – namely, the prioritisation or
sequencing of reforms. Addressing major reforms one at a time enabled adequate
public resources to be brought to bear, while also enabling a focussed public
discussion. The sequence chosen – beginning with the international markets for
currency, capital and goods – in itself created pressure for further reforms in key
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domestic markets (for labour and infrastructure services in particular). These gained
momentum and ultimately accumulated into a reform program of considerable
breadth. The range of ongoing reforms in different areas brought further advantages
through the ability of losers from some reforms to become winners from others.
The pace of change in the different reform streams differed, depending on the
nature of the market and the adjustment issues. Thus, while the floating of the dollar
happened overnight, the tariff reform process, following the attempt to do
essentially the same thing a decade before, became a gradual ‘tops down’ one. An
incremental approach was also followed for the public utility and labour market
reforms. The phasing of reforms served to reduce both the potential economic and
political costs of adjustment. In addition, some specific labour and industry
programs were introduced to assist the adjustment process further (though with
variable success).
These ‘design’ features of the reforms of the 1980s and 90s, while important, can
nevertheless only be part of the story. They beg the question of how such features
were arrived at in the first place. And they are unlikely in themselves to have
overcome the political economy obstacles noted earlier.
There are several other factors that I believe were of more fundamental importance.
None could be said to be novel, let alone offering blinding insights. They boil down
to what we would hopefully all accept as simply good process for developing public
policy – a process that begins by identifying why change is needed; that then
communicates this to the community; before going on to develop a policy solution
that has been properly analysed, tested and, once again, explained. In all of this,
leadership and institutional support were crucial.
Establishing the need for reform
A common theme in the Reform Era successes was general recognition that reform
was needed. This did not mean that there was consensus. It was to be expected that
those who saw themselves disadvantaged by reform – and most real reforms involve
some losers, at least in the short term – would resist it. Support was strongest among
the professional policy cadre – within government, academia and the
‘commentariat’, including opinion media. But there was also strong support from
peak business, and to some extent from community organisations, depending on the
reforms. Broader ‘public opinion’, if not actively supportive, was at least not
actively hostile.
Acceptance that reform was needed did not come about overnight. It emerged over
time, with mounting awareness of the costs of the status quo and the potential gains
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from doing something about them. This in turn resulted from research and evidence
on the deficiencies of existing policies, and deliberate efforts to communicate that
information to the community.
For example, Australia is one of very few developed countries to have substantially
liberalised its industry protection regime unilaterally, outside the conventional
concession-swapping milieu favoured by other countries. It is hard to imagine this
happening in the absence of evidence on the true levels of industry assistance, who
benefitted from it and who effectively paid for it. A novel feature was the
development of analytical tools to estimate relative (net) assistance levels across
industries, and the impacts of protection not just on consumers but also on domestic
‘user’ industries. As a result, the farmers and miners came to appreciate that,
contrary to the accepted myth of ‘protection all round’, a tax on imports was
actually a tax on (their) exports. They accordingly became a countervailing political
force for reform.
Similarly, the reforms that eventually became the National Competition Policy were
built on the foundation of evidence about the costs of existing anti-competitive
arrangements that protected public utilities and other services. For example, it was
demonstrated that many businesses, who were increasingly exposed to international
competition, were bearing excessive costs for vital energy needs because of both
inefficiencies in supply and cross-subsidisation of household demand. The costs to
the economy of governments effectively using public utilities as vehicles for social
welfare became manifest, informing public debate and creating increased
momentum for reform.
A number of key reforms in social policy were similarly made possible by publicly
available evidence of deficiencies in existing arrangements. Sometimes this
evidence was counterintuitive, or contrary to the conventional wisdoms that had
sustained the policies. For example the introduction of the HECS model of
university funding (another Australian innovation) was preceded by information and
public discussion about the perverse distributional effects of ‘free’ education.
Similarly, regulatory reforms to reduce adverse selection in private health insurance
as a consequence of the ‘community rating’ system – long an article of faith and
regarded as politically untouchable – became possible through credible public
evidence that the system had not only became inefficient and unsustainable, but
ultimately also unfair.
Industrial relations provides a more mixed story. The initial moves to a
productivity-based general wages policy, and then to enterprise bargaining, under
the Hawke-Keating Governments, were founded more on commonsense than
detailed empirical verification of the costs of the status quo. Nevertheless, some
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benefitted from research demonstrating the adverse effects on costs and productivity
of work practices in ‘strategic’ industries (coal, building and construction,
stevedoring, meat processing) and research on such issues as youth and long-term
unemployment and their relationship to wage-setting.
Finding and selling the ‘solution’
The major reforms that defined the Era also followed considerable research and
public testing of the pros and cons of different possible reform measures. This
generally occurred through review processes that made effective use of discussion
papers, draft reports or ‘green papers’. In most cases, sufficient time was allotted to
the consultation processes to enable proposals to be properly explained, digested
and responded to, and to inform a wider public debate. This was central to the
industry assistance and national competition policy reform processes, as well as to
the major reforms to financial regulation and taxation.
In the latter case, the Labor Government, on coming to power in 1983, had the
advantage of a detailed report on taxation reform instigated by the preceding
Coalition Government (though still not acted upon). Specific proposals in the
Asprey Report were developed for further public discussion, with this process
culminating in the Tax Summit of 1985. Some options, notably the GST, did not
find sufficient favour and were jettisoned, but as noted, other important changes
were implemented, including capital gains taxation and imputation. (Only one
reform – the abolition of negative gearing – was subsequently reversed.) As we
know, the GST was to make two further appearances in the public arena before
ultimately getting up, demonstrating that even reforms with strong credentials often
need considerable time and effort before winning sufficient support to make them
politically viable.
The process of exposing reform options to proper public scrutiny and debate, in
most cases resulted in significant changes to what was actually implemented. In
some cases, these were necessary improvements to make the reform more costeffective, or to avoid what would have been unintended consequences, that only
became apparent through such consultation. In others, changes were negotiated to
overcome political resistance (as finally for the GST). In both circumstances those
changes ensured that reforms could be implemented and, importantly, sustained.
The experience has been that consultation is valuable not only to develop and get
acceptance for broad reform options, but also to get the detail right in the option that
is finally implemented. For example, the Petroleum Resource Rent Tax took a
couple of years to be developed and a couple more to be refined, through intensive
consultations with industry, before it was finally implemented in 1989. The detail of
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the Life-time Community Rating Scheme took some 18 months to work through,
once the Government had accepted its in-principle merit following the Industry
Commission’s 1997 inquiry into private health insurance. Without good feedback
on the design details, even a broadly agreed reform can run into trouble through
implementation glitches and unintended consequences. Some of the most useful
feedback often comes not from experts, but from those in the firing line of the new
policy (especially in relation to its workability and compliance costs).
Institutions and processes mattered
Evidence, analysis and their influence on the environment for reform in that era did
not occur in a vacuum. Institutions and processes within government played a
crucial role in the reform successes.
Virtually every major reform in this period was preceded by public review
processes that were commissioned by but conducted at arms length from
government; that undertook in-depth research and analysis, and that engaged in
extensive public consultation. These included the Asprey Review, the Campbell and
Martin reviews of the finance sector; the series of inquiries into industry assistance,
government business enterprises and other competition-related topics conducted by
the IAC and Industry Commission, and the Hilmer review of national competition
settings.
These reviews played a central role in establishing the case for reform, and in
identifying (and explaining) the best solutions. In most cases, they drew on earlier
work, and often considerable time elapsed before their recommendations were
finally implemented – in some instances after a further election or change of
government. This again demonstrates the importance of time to reform: allowing
enough of it, and choosing the moment.
The arms length nature of these reviews had a number of important benefits. For
one thing, it meant that the reviews were generally seen as being not only ‘expert’,
but above politics – in what were often politically sensitive, as well as complex,
areas of public policy. This ensured that their recommendations carried more weight
with the community. At the same time, because the reviews were removed from
executive government (at least in a formal sense – they often had secretariats
composed largely of departmental officials) the governments of the day had the
advantage of ‘deniability’. They also had an opportunity, at a distance, to read the
public’s reaction and to consider the implications of different courses of action.
As an aside, it is a fact that most members of the community are rationally ignorant
about policy detail, but they are not oblivious to good process. Their very ignorance
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about complex policy matters means that they look to institutions in which they can
put their trust, and those institutions and processes can become politically very
important in advancing reform. Arguably one reason for the loss of support for the
‘Carbon Pollution Reduction Scheme’ in the lead-up to the last election, for
example, was the ‘Climate-gate’ email scandal that weakened the IPCC’s authority
on the (incomprehensible to most) science of global warming.
For NCP, the Hilmer Review identified a procedural way forward, as well as
making recommendations for specific policy actions. It thus spawned many smaller,
more targeted reviews in different jurisdictions, with public benefit as the common
assessment criterion. The National Competition Council was the institutional
vehicle for bringing coherence to this process and played an important role in
sustaining ongoing reforms (armed with the ability to recommend fiscal sanctions if
justifiable reforms did not proceed).
Nevertheless the experience of the NCP’s legislative review program was that
‘reviews ain’t reviews’. The quality of the reviews undertaken in that period was
highly variable. This was in part due to the sheer number of them, which exceeded
the resources available to do them all well. A proliferation of reviews also confused
the public about what was important, and what governments were trying to achieve.
There was an emerging sense of ‘reform for reform’s sake’ and this was unhelpful
to further progress.
A related problem was that many of the reviews lacked sufficient distance from the
policy department most concerned with the outcome. Experience tells us that if
external consultants are to properly inform public policy, there must be governance
arrangements that can effectively deter them from simply reflecting or secondguessing their client’s wishes. These are also important to the wider credibility of
the reviews. However such arrangements are not very common. More often,
consultants seem to be engaged with the opposite intent.
Leadership was paramount
The Reform Era was unusual in the quality and depth of political leadership. It was
manifest not only at the Federal level, beginning with Bob Hawke’s ascendancy in
1983, but also among key states. Moreover, the leaders of the reformist
governments often had the benefit of Opposition leaders who were broadly
supportive of the major reforms.
Leaders with the right vision for a better Australia and the skills to realise it, were
fundamental to all the individual ‘success factors’ just described – they could be
said to be have been the ultimate success factor.
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Their effectiveness was enhanced, however, by other initiatives at the political level
for which they were ultimately responsible. These included effective cabinet
processes and special committees to provide forums for scrutiny and debate. Among
these, the Structural Adjustment Committee of Cabinet was perhaps the most
notable. It enabled a more coherent approach to identifying priorities within the
wider structural reform agenda, as well as bringing cross-portfolio scrutiny to
individual reform proposals, enabling the various impacts and tradeoffs – economic
and political – to be discussed among the most relevant Ministers.
Another key ingredient lay within the offices of the political leaders themselves –
namely, the people they chose as their advisers. The high calibre and extensive
experience of ‘political staffers’ at that time has perhaps never been equalled. It
ensured that the leaders not only received good advice, overlaying that from their
departments, but that they had people of substance around them to act as sounding
boards and, importantly, to ‘speak truth to power’.
As noted, the task of reformist leaders in that period was also made politically more
tractable by the support they often received from the ‘other side’. For example, it
was crucial to the second round of tariff reductions in 1991, with recession clearly
looming, that Keating’s 5 per cent target, though challenging, was more moderate
than Hewson’s target of zero!
Moreover, the Reform Era was also characterised by strong support from business.
The BCA, NFF, AMIC and ACCI were prepared to back key reforms publicly, even
those that some of their members may not have liked. That was partly because, as
organisations encompassing wide interests, they could rely on the support of other
constituents, but it also reflected the qualities of the people leading those
organisations. A similar observation could be made about the ACTU, which
supported, or at least did not actively oppose, a number of key reforms, including
enterprise bargaining, more pro-competitive arrangements for public utility services
and, to some extent, trade liberalisation.
The challenges ahead
So what does all this mean for the challenges we face in advancing reform today –
and into the future? While there were clearly some special forces at work during the
Reform Era, most of the ‘success factors’ are surely generaliseable. If anything, the
systematic approach to identifying, prioritising and building political support for
structural reform – which the OECD has referred to approvingly as ‘the Australian
model’ – would seem more relevant than ever. Following the election, Government
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ministers emphasised that the imperative was to build consensus behind their
policies to get them through Parliament.
The challenge implicit in this, of course, is to achieve necessary political support for
the right policies. This applies within COAG as well as within the Federal
Parliament. While there is a large menu from which to choose – the COAG Reform
Agenda alone entailing some 200 policy initiatives – governments cannot prosecute
reform successfully on too many fronts at once. A key lesson from the past is that
prioritising and sequencing the reform effort are fundamental to its success.
The current economic context for considering reform priorities to promote
productivity is itself a challenge. One key dimension is the budgetary constraints
that governments face in the aftermath of the Global Crisis. This has limited the
scope for governments to promote productivity improvements through further
spending and investments in the human capital and infrastructure areas that have
been at the centre of the COAG Reform Agenda, pre-dating the crisis. (Moreover,
many of those reform areas cannot yield productivity dividends for a decade or
more.)
A second challenging feature of the current public policy landscape is paradoxically
a bi-product of our economic success, namely structural pressures associated with
the mining boom.
The ‘two (or three!) speed economy’, as it is now called, is not a new phenomenon
in Australia, though it is a few decades since its last major manifestation. (In earlier
times it was labelled the ‘Gregory Effect’, after Professor Bob Gregory’s 1976
exposition of the forces at work.) Now, as then, the chain of economic impacts
begins with windfall wealth from mining and increased domestic spending on nontraded goods, squeezing other traded goods industries via real appreciation of our
currency. There are also some more direct impacts on the supply side, to the extent
that mining competes labour away from other sectors. However, the main pressures
have come from higher incomes and consumption of domestic services,
accentuating longer term structural trends.
The combination of fiscal constraints from the Global Financial Crisis and structural
pressures from the mining boom suggests that the productivity enhancing reforms
that deserve some priority right now are those that can reduce business costs and
enhance the economy’s supply-side responsiveness, while being ‘fiscally
parsimonious’.
Attempts to counter structural pressures by either hobbling the mining sector or
(further) assisting manufacturing, could only detract from Australia’s longer term
productivity performance and living standards. Indeed, there is a stronger case than
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ever right now for reducing any government assistance to manufacturing (or other)
activities that is not justified by genuine market failures – to free up skills needed in
the expanding sectors. As the Commission has noted previously, this would be a
win for both productivity and the budget. (Concerns about the possible reversal of
our good fortune at some point would be better met by saving some of it for later
than undermining it.)
Other big spending areas previously identified as providing scope for ‘win-win’
reforms, include government procurement (not forgetting defence procurement that
favours high cost local production – like submarines costing multiples of equivalent
imported models – without a clear quid pro quo for society); infrastructure projects
that do not demonstrably yield a net social benefit (not forgetting railways), and
those human services programs where benchmark data suggest scope for more costeffective delivery (especially health services, given their magnitude and growth
trajectory).
Most other prospective territory for productivity enhancing reform is regulatory in
nature, with attention needing to be given not only to reducing compliance burdens
(where progress is being made) but also to regulatory constraints on flexibility and
adaptability at the enterprise level, and regulations that distort business decisionmaking. As noted previously, the challenge here is both to reform existing
regulations and to prevent new regulatory impositions that would erode our
productivity performance. Regulatory proposals that would have pervasive effects
across the economy need particular scrutiny, especially those impacting on the
markets for labour and capital, and key infrastructural inputs to production such as
transport (not forgetting coastal shipping), energy, telecommunications and water.
Among these, industrial relations regulation is arguably the most crucial to get right.
Whether productivity growth comes from working harder or working ‘smarter’,
people in workplaces are central to it. The incentives they face and how well their
skills are deployed and redeployed in the multitude of enterprises that make up our
economy underpins its aggregate performance. It is therefore vital to ensure that
regulations intended to promote fairness in Australia’s workplaces do not detract
unduly from their productivity. Getting the balance right is challenging and requires
careful ex ante assessment and ex post review. This is particularly important in the
context of the structural pressures described earlier, given the premium they place
on flexible, adaptable labour markets. However, regulatory changes (in both
directions) have generally been exempt from even the cursory obligations of
regulation impact statements. If we are to secure Australia’s productivity potential
into the future, the regulation of labour markets cannot remain a no-go area for
evidence-based policy making.
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The renewed policy priority being attached to carbon pricing also has significant
implications for productivity. Given the marked asymmetry between the costs and
benefits of action by Australia – pending a significant global response – perhaps the
strongest economic argument for carbon pricing is that it would displace more
costly alternative measures targeted at particular products or technologies. If this
were not achieved, the potential value of any new economy-wide instrument would
be compromised. Unfortunately, most of the programs in question serve more as
industry assistance than environmental assistance, and they will accordingly be
difficult to terminate.
The need for regulatory vigilance has if anything been heightened by the Global
Financial Crisis and its aftermath. For one thing, in times of fiscal stringency there
is more risk of regulatory measures being adopted to get around budgetary
constraints (for example, anti-competitive regulation rather than subsidies for
Community Service Obligations); for another, the economic crisis has given rise to
renewed pressure for regulatory interventions of various kinds. To take the example
of banking, Australia managed to ‘dodge a bullet’ from template international
regulatory changes; but recent domestic proposals – such as to address alleged
‘price signalling’ – pose risks of their own.
Even this brief re-cap of some current priorities suggests that the political
difficulties facing (real) productivity-enhancing reform are at least comparable to
those of the past. As in the past, it will be necessary to carefully build and
effectively sell the case for such reforms, while resisting demands for policies that
would take us backwards. In both cases, sound evidence on what is at stake for our
economy and society has a fundamental role to play. Within the ‘new paradigm’,
there will be more call on political negotiation to get reforms through than in the
past. The challenge is to ensure that this does not compromise their essential
character and their potential benefits. The stronger the evidence base for a proposed
reform, and the better the consultative processes underpinning it, the greater are the
chances that it will end up being a ‘successful reform’.
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